Last Minute Money Moves to Lower Taxes
NEW YORK ( MainStreet) A new year often brings changes in tax law and while April 15 is the traditional deadline to file a return, some deductions can potentially lower Uncle Sam's annual bill if executed by New Year's Eve.
"Deductions reduce federal taxes in the amount of the taxpayer's bracket," said Rick Rodgers, a certified financial planner and president of Rodgers & Associates in Lancaster, Pa. "In 2013, tax brackets range from 10% to 39.6%. Therefore, a $1,000 deduction will save between $100 and $396 in taxes."
Here are the essential tips to know as the year comes to a close:
1. Medical and business expenses can be deducted if over a certain amount. Consolidate eligible expenses to meet requirements.
"Unreimbursed medical expenses for most taxpayers must clear a floor of 10% of adjusted gross income before they can be deducted," said Rebecca Pavese, CPA and financial planner with Palisades Hudson Financial Group in Atlanta. "Unreimbursed business expenses for employees are reported on Schedule A as miscellaneous itemized deductions. These expenses must exceed 2% of adjusted gross income but unless you are self-employed business expenses and medical expenses are not consolidated."
2. Pay January's mortgage payment in December to deduct the interest on 2013 taxes.
"While there is really no escaping the hefty debt of a mortgage, making even one extra mortgage payment a year could end up saving you thousands in interest over the years," said Scott Cramer, a financial advisor and endowment strategist with Cramer & Rauchegger.
3. Consider making an extra deposit to your 401(k) plan or IRA to get the full tax benefit. Workers can contribute up to $17,500 in 2013 to a 401(k) plus an additional $5,500 when aged 50 or older.
"A taxpayer with deductible medical and/or business expenses will be able to take a higher deduction when they contribute to their 401(k)," Rodgers told MainStreet.
4. Year end is the time to review stock and bond allocations but selling without a tax strategy could result in higher taxes.
"Look for opportunities to sell overweight positions in your IRAs and 401(k) before realizing gains in taxable accounts," said Paul Jacobs, chief investment officer with Palisades Hudson Financial Group. "If you can't make all your trades in retirement accounts, you'll need a good strategy to minimize taxes."
Jacobs recommends buying short-term funds that invest in high-quality taxable or tax-free bonds that mature in less than a year, such as the DFA One-Year Fixed Income Fund (DFIHX) and the Vanguard Short-Term Tax Exempt Fund (VWSTX). "We recommend holding them until interest rates increase to historically normal levels," Jacobs said. "These funds produced a slight positive return this year to date despite rate increases and are well positioned to withstand rising rates in the future."